Gov. Jennifer Granholm has an opportunity to encourage the creation of high-paying jobs in the state while helping to lower gasoline prices. A clear signal from her administration that the state would welcome construction of a new oil refinery could provide a much needed boost to the state’s lagging economy.
A new refinery would require private investment of approximately $2.5 billion, which would create construction jobs, as well as the long-term, high-paying jobs necessary to operate the facility. The state currently has only one oil refinery, which is operated by Marathon Oil and located south of Detroit.
Hurricanes Katrina and Rita have shown how vulnerable the United States is to a disruption of its petroleum supply. Energy security is threatened by having most of the U.S. refineries located in hurricane prone regions of the country. Michigan, which faces minimal threat from hurricanes or earthquakes, could provide the United States with increased geographic diversity for oil refining capacity. Michigan has the additional advantage of ports on the Great Lakes, where crude oil could be unloaded. These ports would have to be deepened to accept the largest tankers, or, alternatively, oil companies might be able to emulate the feeder system successfully utilized in Europe, where the largest ships dock at major coastal ports and transfer their cargo to smaller ships.
The lack of refining capacity in the United States has been three decades in the making. According to the Department of Energy, there were 324 refineries with a total capacity of 18.6 million barrels per day in 1981. Today, the number of refineries has shrunk to 132 refineries with capacity of approximately 16.8 million barrels per day. During the same period, U.S. demand for gasoline has increased by 30 percent. Refineries are typically running at 96 percent of capacity, which does not leave much slack for maintenance, equipment failures or weather-related emergencies such as hurricanes.
In addition to increased purchases of foreign oil, the United States — which once produced all its own gasoline — now relies on foreign-produced gasoline for 14 percent of its supply. Many elected officials, including Gov. Granholm, lament the loss of manufacturing jobs to countries with lower labor costs. A Michigan oil refinery would replace some of those lost jobs while increasing the refining capacity of the state and nation. Siting of an oil refinery in the state is a vastly superior strategy to Gov. Granholm’s call for gasoline price caps, which could lead to long lines at gas stations as experienced in the 1970s.
With oil refineries running at 96 percent of capacity, why haven’t oil companies moved to build new refineries? The reasons most often cited by oil companies are stringent environmental requirements, opposition from the "not-in-my-backyard" crowd and an average rate of return of only 6 percent on existing refineries.
The first obstacle could be eased by the Granholm administration streamlining the regulatory red tape and taking advantage of the new flexibility on construction rules enacted by Congress and endorsed by the Bush administration.
The second objection is unlikely when many Michigan communities are in desperate need of good jobs and would welcome a multibillion dollar investment.
Third, although the rate of return has been historically low for operating refineries, the oil companies are experiencing record profits, 38 percent higher in the second quarter of this year compared to the same quarter in 2004, as reported by the Department of Energy. These profits create opportunities for capital investment in infrastructure and would be timely for oil companies facing ill-conceived attempts to regulate profits.
Elected officials of both parties in Michigan seem willing to gamble state dollars to attract jobs, whether through bonding or securitization of tobacco settlement monies. Working to attract a new oil refinery to the state seems much less risky than investing taxpayers’ money in unproven technologies or forcing energy suppliers to subsidize "alternatives" such as ethanol and wind power. The time to act is now; Michigan cannot afford to wait. To take advantage of this opportunity — and make it a reality — will depend on active leadership from the governor.
Russ Harding is senior environmental policy analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.